What is conditional approval for a home loan?

Conditional approval for a home loan can help you hunt for a house with confidence. We consider what you’ll need if you’re thinking about applying, as well as a few potential pros and cons.

When you’re looking to buy a new property, whether it’s one you plan to live in or to use as an investment, it can be useful to have an idea of how much a bank or lender will be willing to loan you for the purchase. This is where conditional approval can come in handy.

What is conditional approval for a home loan?

Conditional approval, also known as pre-approval, is when a lender agrees in principle to loan you up to a certain amount of money towards the purchase of a home. Conditional approval can allow you to hunt for a property with greater confidence, as you will have a clear idea of your budget and how much a lender is likely to be willing to offer you for a purchase.

Conditional approval vs unconditional approval for home loans:

It’s important to understand that conditional approval is not the same as final approval, and there are still steps that a lender will want to take before fully signing off on a home loan application.

A home loan is only considered unconditional when your lender notifies you that you have been granted approval for the loan, and you sign the loan documents.

Do you need conditional approval when buying a home?

No, conditional approval is not required when purchasing a home, and you are able to apply for finance after your offer on a property has been accepted.

Generally speaking, when you purchase a property, the contract will include a ‘finance clause’, which sets a deadline up until which the contract will be conditional on you successfully getting finance to complete the purchase.

If you do not have pre-approved finance, you will need to commence the finance application process at the point when your offer to buy a home is accepted.

Conditional approval merely means that you have already put in a good deal of the legwork when it comes to applying for finance, and you may only need your lender’s final stamp of approval.

Explore further: What is the cooling off period when buying a property?

What do you need to get conditional approval?

When you apply for conditional approval for a home loan, a lender will typically check your credit score and conduct an assessment of your finances, so you’ll need to be prepared to present information relating to such things as:

• your wages or salary
• your expenses (food, bills, rent, etc.)
• your assets (cars, shares, etc.)
• your debts (credit cards, loans, etc.)

Your lender will also want to know some information about the type of dwelling you wish to buy – for example, the type of property (apartment or house), the size (number of bedrooms, for example) and the general location.

How long does conditional approval last?

Conditional approval typically lasts for around three months from the date it’s granted, but this varies between lenders. It’s usually limited because your financial position could change within that time – for example, if your employment situation changes, or you take on any more debt.

For this reason, if you’ve not found a property within the three months of your conditional approval, and you wish to reactivate it, you may need to reapply. It’s a wise idea to keep in touch with your lender, and advise them well in advance if you think you may not find a property within the conditional approval period.

It’s worth keeping in mind that each time you apply for a credit product, the bank or lender will perform a credit check, and this has the potential to negatively impact your credit score.

It can be wise to hold off on applying for conditional approval until you are seriously considering a purchase, in order to avoid the need for reapplying down the line and potentially harming your credit score.

What are some advantages of getting conditional approval?

Some key potential advantages of obtaining conditional approval are that it can give you a clearer idea of your budget, and might give you an edge over other buyers.

Clear idea of your budget

If a bank or lender grants you conditional approval for a home loan, then they will grant it for up to a specific amount. This may be useful to you as it will give you an idea of the maximum you will be able to borrow, and you can narrow down your search accordingly based on that budget.

An edge over other buyers

Another potential advantage of conditional approval is that having your finances in order can make you seem like a more motivated buyer, and show a seller that you are serious about purchasing a property.

Having conditionally approved finance can make you more attractive to a seller in that it indicates your offer is less likely to be withdrawn due to lack of financing, making you potentially less risky than a buyer who doesn’t have their finance pre-approved.

Obtaining conditional approval can also make you attractive to a seller in that you may be able to offer them a shorter settlement period, because a lender has already pre-approved a loan for you. For a motivated seller who wishes to sell their property quickly, this could be appealing. (But it’s wise to check with your lender before adding a settlement period to a contract.)

What are some disadvantages of getting conditional approval?

One possible disadvantage of getting pre-approval is the potential for it to have a negative impact on your credit score.

While it is not a ‘disadvantage’ as such, it’s also important to remember that conditional approval doesn’t guarantee you a loan, as your lender will still need to give final signoff.

Potential negative impact on your credit score

When you make an application for home loan conditional approval, it will be visible on your credit report as a loan enquiry. Suncorp advises that if you are seeking conditional approval, you should not apply with multiple lenders as multiple credit checks in quick succession can give the impression that you are financially unstable.

The lower your credit score, the more risky a bank or lender may perceive you to be as a borrower, and therefore the less they might be willing to loan you. For this reason, it may be advisable to only apply for conditional approval from one lender, and only when you are sure you are ready to purchase.

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You are not guaranteed to get a loan

While conditional approval means you are more likely to have a loan application approved, it’s important to keep in mind that it’s not a guarantee you will obtain finance.

Suncorp notes that once your offer has been accepted on a house, your lender will consider a number of factors before signing off, these being:

• changes to your personal circumstances
• changes to government regulations
• a negative valuation of the property
• a change in the property’s condition

It also notes that if your personal financial circumstances have not changed, and the property is satisfactory (meaning, for example, the valuation does not indicate you are overpaying), then you have a good chance of being approved.

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